Good Managers Admit Their Mistakes

Netflix (NFLX) did something intelligent, constructive and unusual yesterday. It admitted a mistake.

A few weeks ago, Netflix CEO Reed Hastings announced that, in the wake of an unpopular price hike, the company would split its streaming and DVD-by-mail services onto two separate websites. Users who wanted both services would have had separate accounts, with separate passwords, separate queues and separate billing information. As a crowning indignity, the Netflix name would have gone to the online service, while the DVDs that built the Netflix brand would come from a new site called Qwikster. It was as though Japan’s largest carmaker had decided to call its best-selling sedan the Scion Camry.

I was one of many who criticized the move. The Netflix blog was deluged with comments, few of them positive.

To their credit, Hastings and his associates listened. In a brief blog post on Monday, Hastings wrote, “It is clear that for many of our members two websites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs.”

It’s hard to admit being wrong. Correcting a mistake involves acknowledging that you made one. Managers learn this in business school, but following this principle demands that we overcome our instincts.

Psychologists tell us that our “self-enhancing bias” makes us quick to take credit for our successes, while we are prone to blame external factors for our failures. Hastings might have been tempted to blame the Qwikster debacle on another member of his team, or he might have attributed the negative reaction to lingering resentment over a price increase that Netflix imposed over the summer. He might have also blamed that price increase on the studios that are demanding more money for the content that Netflix distributes.

Instead, Hastings simply announced the change of plan without fuss. He did not use the words “I’m sorry” or “apology,” but he did not try to evade responsibility, either.

We also sometimes resist correcting mistakes because of our natural tendency to loss aversion. After making a bad investment, we tend to stick with the original choice to prove that we were right. Or we might try to at least hold on long enough to recoup our losses, even if the chance of recovery is slim. The fact is that sunk costs are simply that: sunk. But once we’ve taken a road, it is hard to confess it’s the wrong way and to backtrack.

Self-enhancement and loss aversion are amplified in people in positions of power. Bosses often feel they need to appear infallible. In truth, however, it was smart of Hastings to take his customers’ reactions into account, especially regarding a move with no direct effect on prices. “We underestimated the appeal of the single web site and a single service,” Netflix spokesman Steve Swasey said in a phone interview, according to The New York Times. “We greatly underestimated it.” Admitting that it misread customer preferences allowed Netflix to respond quickly and constructively.

Such nimble reactions are not the rule. Ford pushed its ill-fated Edsel line through the 1958 and 1959 model years before abruptly pulling the plug on Edsel and its dealers in November 1959, just after the 1960 models went on sale. Edsel went on to become the classic case study of bad product management. More recently, General Motors built its EV1 electric car from 1996 to 2003. Then it collected the groundbreaking but uneconomical vehicles and destroyed most of them at its desert proving grounds, rebuffing attempts by collectors to buy them. Talk about burying your mistakes.

In the computer world, IBM continued to push its OS/2 operating system and the PS/2 personal computer lines that it launched in 1987 long after it was clear that the marketplace favored Microsoft Windows and the open architecture of Windows-compatible machines. IBM permanently lost its leadership in the PC market. Hewlett-Packard is now on its fourth CEO in the past 14 months and sixth since 2005, if we count a couple of interim appointments. HP’s board of directors has never acknowledged that the hiring or replacement of any of these executives was a mistake.

Congratulations to Netflix and its CEO for taking such an intelligent and sadly unusual step. More bosses could stand to try out three little words: “I was wrong.”

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.